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The Breakfast Briefing

Evidence is piling up that mom-and-pop investors are coming back to stocks.

The “smart money” is also getting pretty bullish.

A survey last week showed investment managers were not only long stocks, but they were leveraging their portfolios to take on even more risk at a rate last seen in January 2007, according to the National Association of Active Investment Managers.

“The bears of the group have given up,” Will Hepburn, president at Hepburn Capital Management and originator of the survey, said in a chat with MarketBeat.

The average investment manager polled was holding a net long position of 104%, the second highest mark since the survey began in July 2006, according to NAAIM, which measures the equity exposure of its roughly 160 members that manage about $20 billion in assets.

Such confidence in the market coincided with the Dow’s rally to 14000 last week, the first time the blue chips have touched the big, round number since October 2007. The Dow fell 129 points on Monday, the biggest drop of the year.

Yet some market participants are interpreting the latest round of bubbly bullishness with a hint of skepticism.

“There’s little doubt that these folks are sharp and savvy investors,” Jason Goepfert, founder of Sundial Capital Research, wrote last week. “But when — as a group — they position themselves aggressively in one direction, the market tends to go the other way. This is a negative for stocks.”

NAAIM’s weekly reports combined with sentiment data from both the American Association of Intelligent Investors and Investors Intelligence point to individual investors and financial advisers getting more bullish on stocks. Stock buyers have also started making a comeback this year: Stock mutual funds and exchange-traded funds kicked off the year by taking in $34.2 billion, the biggest four-week inflow of cash since 1996, according to Lipper Inc.

While the S&P 500 rose 5% in January, its best start to a year since 1997, many investors say the recent gains have made the market ripe for a pullback.

“Overdue is an understatement,” Randy Frederick, managing director of trading and derivatives at brokerage Charles Schwab Corp., told MarketBeat. “We’re absolutely overdue. The market has basically been going straight up since the beginning of the year. I suspect we’ll see some kind of pullback.”

Frederick foresees a scenario in which the S&P 500 embarks on a “healthy pullback” to 1465 before it resumes its climb higher. The index closed Monday at 1495.

If his forecast plays out, he’d recommend investors using the drop as a buying opportunity.

“We’re absolutely in a market where buying the dips makes sense right now,” he said.

Morning MarketBeat Daily Factoid: On this day in 1997, Morgan Stanley announced a $10 billion merger with brokerage and securities firm Dean Witter.

Buffett Back in Muni-Bond Insurance — For Now: “Warren Buffett is back in the bond-insurance game—for the moment, at least. Mr. Buffett’s Berkshire Hathaway Inc. is reviving its dormant bond-insurance arm as it backs municipal bonds tied to a massive mixed-use development in Texas, according to bond-offering documents.”

Bridgewater to Launch New Fund: “Bridgewater Associates told its investors that it will launch a new hedge fund this year, and had sold another minority equity stake in the firm to an unidentified buyer to help ensure its long-term viability.”

SEC Expands Probe on Executive Trades: “The Securities and Exchange Commission, expanding a high-profile investigation, is gathering data on a broad number of trades by corporate executives in shares of their own companies, according to people familiar with the probe.”

Rearview Risks for American Autos: “It is a good bet that U.S. car sales will get significantly better this year. But auto makers should be careful about extrapolating such gains into the future. The same goes for investors.”

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